Saturday, October 11, 2008

101 Things To Do In A Market Sell-Off

Oh just take it or leave it
And take it or leave it
Oh take it

Oh that's right, he's gonna let you down
He's gonna let you down
He's gonna let you down.
And gonna break your back, for a chance
And gonna steal your friends, if he can
He's gonna win someday
Oh he will
--The Strokes

Here are a few thoughts on the current financial and economic crisis, that you can take or leave, and add to your own analysis of the situation:

Don't Sell Your Stocks At This Point

If you are invested in blue chip stocks and haven't sold out by now, there really is no point of selling. Look at the historical trends during a downturn - If you had locked in your losses during the last downturn in 2001, there were huge gains that were lost in the aftermath if you had a stake in the main players. Unless you are going to retire in the next five years, just hold your head, dig deep and keep buying over the downturn in small measures to reduce risk and come away with larger returns in the upturn. It sounds like a bad bet, but Canadian blue chip stocks are in reasonably good shape and have adequate capital reserves.

Currently, the key Canadian stocks of national and international importance are our bank stocks, which are priced at 10:1 P/E, which is low by any measure, especially since historical prices of the US market trend towards 15:1. It's true that the future earnings of our banks will may be reduced because of the downturn, but so far, we appear to be in good shape, economically, and by comparison with other western jurisdictions (ie: Europe, the US) we are a great buy. Yes, things will get worse, but is anyone worried that the big Canadian Banks will go under? Not a good bet (knock on wood).

The Depression Matters - But Its Not That Bad. Yet....
There are historical parrellels that matter - a bursting bubble, liquidity issues, and a lack of confidence in the financial system. The mistakes of the Depression are legendary, and well-known to anyone with intro-Econ classes behind them, and not likely to be repeated...mainly.

Ben Bernanke, for all his detractors' legitimate issues with him, is amongst the top experts on the depression, and his appointment now seems like clairvoyence. The main regulatory mistakes were:

Tight monetary policy - the governments of the day were keen on strengthening their currencies to stop capital flight. Today, capital flight is occuring in the US, but the Fed is keeping its head and telegraphing its need to reduce interest rates to keep liquidity high. In a stroke of enlightened internationalism yesterday, the world's central banks all decided to drop interest rates by a half percent. Good work, policy wonks!

Tariff barriers were raised - In the Depression, tariffs went up to protect domestic industries in the US, and Europe answered in kind, throwing many wrenches, big and small, into the cogs of capitalism. Yes, the Doha round of talks at the WTO is on its deathbed, but tariffs have been on a historical downturn for better part of a century, and with the free markets of the Euro-area, ASEAN, APEC, NAFTA, and other FTA's, the open borders will keep commerce moving and prevent unilateral tariffs being raised.

Delayed Action - The Depression wasn't just famous for its poor decision making by governments, it was also known for its initial lack of decision making. In the US and in Canada, laissez-faire ideologues in executive roles meant that the market downturn and bank failures would be left to market forces. In the US, Bernanke seems to have gotten the message...but in Canada...?

...But There Are Mistakes Being Made
For all the good things that the US federal reserve is able to do, there are some problems outside the US that are going to be issues in the short to mid term:

Europe Lacks Unity - While we can be glad that the EU has a common economic and interest rate policy in this disaster, the lack of common policy on securing bank deposits or coming up with a common bank bailout fund mean trouble. The problem is that the EU may be already burdened with long term Euroskepticism from some quarters, already at odds with massive centralized spending from Brussels. Who in Northern England will want to see more money spent in bailing out banks failing in Poland? Merkel came out against Ireland guaranteeing Irish bank deposits, and promptly took the same action the next day.

Let's hope Europe gets its act together and realizes that, yes, bank failures in one corner of the EU could have a disastrous local effect (see Iceland's bank meltdown that had ramifications for depositors in Norway).

Running Balanced Budgets In A Recession Is Not A Virtue
I am a fiscal conservative, partly because of my disgust over waste during the Chretien years, when one Liberal minister famously said in discussing a budget "Y'know, a hundred million here, a hundred million there...pretty soon your dealing with a lot of money."

Also, there is a real moral issue when we consider the waste of government on an individual basis. How can we turn a blind eye to government waste of even a million dollars, when for many of us, that may be the culmination of a lifetime of paying tax? If an official can blindly throw the life's work of a Canadian down the drain with couple expense accounts of senior Ottawa officials, there is a moral necessity to keep a tight leash on government.

I've worked in government before, and I have a good idea of some of the issues surrounding government waste at a provincial and federal level. I know why there is a push for tight budgets from the public as a whole, and why in Canada it has become a moral obligation for governments to keep spending under control. I remember the end of the Mulroney years, and years under NDP governments out west where NDP leadership had no idea of how to form a budget, and the Bush years in the US. These are not lost lessons on myself.

I realize the perils of deficit financing (ie: interest payments, lowered credit ratings) and we do not need to the bad old days of ramping up spending in to the stratosphere.


Canada and other G7 nations should not be held hostage by balanced budgets in a time of crisis.

If keeping our financial system in tact and liquidity high means that we raise our national debt by 1%, let's keep our potential deficits in perspective of the total national debt and the total GDP. Canada has a debt of approximately $400B, which is big but manageable in terms of our GDP of approximately $1.2 trillion. We have come a long way from a time when our national debt was almost 100% of our GDP and that is something we can thank Paul Martin (I hated writing that) for.

But what were we preparing for during the Liberal years when they created a contingency fund? Why did we care if we had high credit ratings during the years Canada was flush with cash if we couldn't utilize our relatively low debt levels to take on marginally more debt during a downturn?

The rainy day is here. We need to loosen the purse strings to keep things going, and yes, possibly run the risk of going into the red. I don't like it, but that is the reality of the current situation. That doesn't mean wasting money, and it doesn't mean opening the flood gates, but prudent government spending in a downturn will stave off some of the worst of the affects of a crisis, but the time to spend is now.

If a government waits too long, the possible positive affects of spending may not be felt until the downturn is over, meaning a wild whipsaw of an overheated economy during the upturn. The current government's inaction and lack of foresight may force poor and delayed decision making on this issue, and I hope it's not too late.

And finally, the silver lining....

Music Is Going To Get Better
Every economic downturn of the last 40 years or so has meant better music.

The first bad downturn during this period, was in the late seventies, which meant an end to glam rock, and bloated, private airplane touring, coke-binging supergroups, like Eagles and Led Zeppelin, which were way past their time, and gave way to leaner, meaner, DIY artists, intent on creative destruction. The Clash, Sex Pistols and Ramones effectively demolished the professional, executive run and polished sound of established and uninteresting studio artists.

The garage-punk bands may not have had the technical excellence (Joe Strummer and Co. could never pull off the live, dual guitar solo of "Hotel California") or audio precision (see: Steely Dan's "Aja", vs. The Clash's self titled debut), but what they lacked in corporate polish, they made up for in energy and creativity.

They took a science and made it an art again. They took an architectural blueprint of precision and made it a Jackson Pollock ink splattered mess.

The second instance of this phenomenon was the 90-91 downturn, which really started during the end of the eighties, post-87's Black Monday. The late eighties music consisted again, of the monolithic glam rock bands like Poison, G'n'R (yes, they didn't get out of this unscarred), Def Leppard, Van Halen, Bon Jovi, Skid Row, and others. While the Stooges and MC5 were the undercurrents of garage music that was under the radar before the emergence of the Ramones, the Pixies and Jane's Addiction defined the undercurrents of Alternative and Grunge before Nirvana.

As soon as Nirvana arrived, the idea of a Van Halen album and accompanying tour with oversized mullets, neon tights and synth riffs became ridiculous.

Fast forward to the late nineties/early millenium, and superselling boy bands, the modern day Bay City Rollers feasted on high disposable incomes and again highly polished music industry that focused mass attention on a few chosen pop groups. Almost as soon as the era of starlets and boy bands had begun, 9/11 and the long downturn of the US stocks and economy catapulted garage bands back to the forefront. The Strokes were the dark horses, coming out a previously stagnant NY rock scene, only to lead the charge of the Hives, the Vines, the Libertines, the White Stripes and the Yeah Yeah Yeahs.

Today, the oversized, over commercialized superstars that are due for a hard fall are obvious. Turn on commericial radio, and they consist of two categories of douchebags - the high flying R&B/Rap artists and the Nickelback, Default, Theory of A Deadman axis of rock evil.

While rap was, and is on certain levels, the greatest of subversive music to emerge from the late seventies, it is almost certainly due for downfall, similar to the early nineties, where the street artists took over from their overly commercial and wealthy brethren. This revolution was typified by one event, when LL Cool J, turned up for an charity event in the late 80's, with Mr. T type bling on, and was roundly booed by all who attended. It was the age of NWA, and the size of your gold chain(s) was being inversely proportionate to how "real" you were.

To summarize, Canada is going to whether the downturn, but we and the Europeans are making mistakes that need to be corrected, and so far the best jurisdiction dealing with this crisis from their Central Bank is, suprisingly, the US. And music is going to get marginally better as the Age Of Bling dies a horrid death. Again.

Monday, October 10, 2005

I hereby kill my last post about the East Vs. the West


I really didn't like the post about Rural Revolt. When I read it I'm reminded of Orientalism by Edward Said I think that it is based on some very poorly constructed stereotypes about the east and the west.

I really think the ideas we have as Westerners about the East and vice versa should be critiqued and reviewed, but that was not the way to do it...I hereby disavow any opinions cited in my last post:

Thursday, September 01, 2005

Koizumi: Latent Renegade Reformer

In my own personal conversations with many Japanese people over the last year, I asked a few questions over and over again: How many famous Canadians do you know? Answer: um...just Avril Lavigne. Where have you travelled? Answer(s): Australia,Bali, or Los Angeles. What do you think of Junichiro Koizumi? Answer: (Awkward grin and a shake of the head.)

Digging deeper, I found disappointment with Koizumi, a man that rose to prominance on the world stage in 2001 promising reform of the cozy power system that had failed Japan badly after the Nikkei crash of 1989. But the power brokers of industry, government owned business and finance did not relinquish power over the Liberal Democratic Party. With the rise of the long haired rebel, the people of Japan saw a glimpse of renegade who promised to destroy the old order and bring Japan's government into the same century as its futuristic technology sector.

Of course, part of consumer/voter satisfaction with any good or leader is partly based on expectations. Those in customer service are told to "under" promise and "over" deliver to set low customer expectations and then blow those expectations out of the water with (theoretically) outstanding service. Koizumi, for his part, believed at some point he could take on the huge ship of state that is Japan and muscle it to a brighter future. And like any idealist who achieves power, things began to look very different from the top looking down. Simple solutions to simple problems become simply unworkable, or in some cases not immediately available.

Koizumi decided to start small with reform and began setting low maximum bad debt allowances for the banks in an effort to rid their balance sheets of the "Zombie" companies that have plagued Japan since time began. These poorly run construction and public works entities subsist on a neverending supply of loans from the huge Japanese banks (who were usually coerced by the government into issuing the financing). The zombies could get away with getting more cash with the ever shrewd Enron tactic that goes like this "If you cut off our cash, you won't see a dime of your other loans again". Under the new administration the banks were pressure to start calling in the loans or writing them off-But this is hardly the stuff of revolutions.

No politician gets a great headline out of "New Bank Regulations Put Thousands Out of Work". And even worse, the tangible results of his efforts were hidden because one lender was still (and continues) propping up the zombie companies. One lender was still financing the massive infrastructure programs in Nara Prefecture that saw millions wasted on expensive and redundant public rail lines soaring 20 Meters above the rural towns. The world's largest lender was still crowding out investment in package delivery, finance, banking, and insurance.

The Post Office.

With wide public support, Koizumi has found an issue to shake out the old guard of his party into open insubordination and rebellion: The privatization of Japan's Post Office. And with the old guard vowing to hold a last stand to protect the institution, those rebels have found themselves politically isolated from their party and the Japanese electorate.

Freed of the internal party albatross, Koizumi will be able to finally shake off the inertia that has kept Japan's financial reform in park for 15 years. From the outset it was a gamble by both sides: Koizumi and the old guard. The entrenched conservative leadership believed they would survive by promoting the appearance of reform by hoisting Koizumi on their shoulders, while Koizumi believed he could turn the tables on those who brought him to power. Koizumi, having come out on top, will now have an opportunity to overhaul the stagnant economy and a powerful mandate for reform and rejuvination of the Japanese islands.
Crossposted @ Shamrocks!

Friday, August 26, 2005

Call And Response: Softwood Retaliation

Above the 49th parallel, the rhetoric from (surprisingly) both sides of the political aisle has become heated in response to the American intransigence over softwood imports. The US, having told a meeting of first ministers (via their ambassador) that Canada should quiet down and negotiate, has been relaxed and unconcerned about possible trade ramifications. While Canadians fret over the end of North American treaties and a deterioration of trust in joint declarations with the US, the US has carried on with a business-as-usual attitude.

The problem facing Canada is: What next?

What is the appropriate response to the actions of a larger opponent who neither sees you as a threat, nor seems to notice your existence?

One suggested response to the softwood dispute sees Canada tacking huge tariffs on California wines headed for the northern border. This idea seems plausible, given the mulitude of wines stocking Canadian shelves and the wide range of substitutes and replacements for the Cali wine. The problem is that the US government is not under pressure from California saw mills to apply softwood tariffs, and it is not sensitive to the demands of Californians, regardless. California, on a federal level, is Democrat country, and the administration knows it. President Bush has never even visited San Francisco in either of his presidential terms, and has no plans to do so. Striking at the heart of the Napa Valley with tariffs might put a dent in the bottom line of the extras from "Of Mice And Men", but that mosquito bite will not register in the Red States that Republicans are banking on to re-elect them next year in the senate.

A more interesting retaliation tactic has Canada "embarrassing" the administration through a New York Times advertising assault: A propaganda campaign designed to humiliate the administration into submission. The logic is that Americans are simply unaware of their governments' actions, and that a full fledged expose' would start a media avalanche that ends in the dropping of Softwood tariffs. The problem is that a media campaign with a target market of people already disillusioned with the Bush administration will have minimal impact. If these same readers failed to stop their own country from going to war, would they think their efforts on behalf of Canada would succeed? Probably not. They would check their schedules and see that lounge singer they love is playing at that quaint cafe in the Village the same night as the "Save Canadian Lubmer" protest.

Then there is the nuclear option: Oil. Canada has it. The US wants it. For our federal government, oil has never been off the table in terms of trade leverage and in public communications and in trade negotiations, it never should be. Oil, whether special interest groups like it or not, is a threat that has the power to unhinge the US from its negotiating positions. In today's markets, we may not have the ability (politically or logistically) to direct all of our imports away from the US or impose massive tariffs, but we can take actions that will compromise the US' energy supply from Canada while keeping our oil exports expanding. The answers to our problem? The subcontinent and China. The CIA has only recently recognized that Alberta has the second biggest oil reserves behind only Saudi Arabia and the huge oil fields of the coast of British Columbia are money in the bank.

The prospect of interrupting oil supplies also rears its head in the far north, where the US is planning the drilling of Alaskan oil to alleviate American dependence on foreign oil. The problem for the Americans is that all of the proposed pipelines go through Canadian soil and that means leverage at the bargaining table. While the government has struck deals with the Natives of the Mackenzie River Delta, it could simply hold up building the pipeline until softwood tariffs are dropped. This could be a hot button issue in the House this fall as there is scheduled to be a vote on the proposed drilling. Canada might use this opportunity to draw attention to softwood while Republicans face a potential huge political loss going into an election year.

One viable option is: Canada should begin to trim future participation of the US in investment deals on the oil patch where all else being equal, India and/or China present a competitive bid.

The expansion of Canada's 44B oil and gas industry and an expanding market in the east present an interesting prospect for the Canadian economy. If Canada can expand its oil and gas exports to the east, it could begin to build profitable trade relationships building on that one industry. Valuable trade relationships could be forged, preferable with India, a country with a shared history and a similar value system to Canada. And with human capital in British Columbia providing a valuable link to both nations, Canada has only to push open the door to expanded trade with both nations.

In the long run, Canada should see that the problem lies not only in the US' lack of honour in trade agreements, but also our dependence on the US. While Canada manages to keep a low but positive profile on the world stage, it has failed to turn that into a commercial advantage and suffers from a lack of diverse trading partners. While most countries would cringe at a 85% single source export market, Canada has sat on its trade laurels since NAFTA's inception, signing few trade deals of significance. As a result, Canada has been vulnerable to change in US government policy-policy from a country that has strong protectionist impulses at the best of times.

The solution is mult-faceted and complex, but we need to become part of other trading blocs. One key bloc that is maturing and growing in the most dynamic region of the world is ASEAN. Canada's own Westcoast has numerous ties with the Far East, and would make a natural fit a Pacific trade partner to this expanding group. Opening southeast Asia to Canadian trade would mean vast resources of markets and people for Canada, and a reciprocal market for those in Asia. The next trading bloc that Canada needs to make inroads with is the European Union. Again, Canada has numerous ties to Europe (and is frequently lumped in with Western Europe on all kinds of issues) but has failed to turn those ties into trading relationships. While it would be unrealistic to think in terms of acceptance into the EU, a strong trade treaty would see Canada as trading partner with access to both North American and European markets.

In the short term however, Canada has to be ready and able to anihilate American resistance to abiding to international law with concentrated action in direct retaliation with a shot across the bow to set the tone for future Northwest Passage talks (which incidently would be the loophole in a Canadian decision to block a oil pipeline from Northern Alaska). In the long run, Canada has to start diversifying its trade away from the US, and into growth markets with oil and gas markets initially, and later with comprehensive trade agreements.

Monday, July 04, 2005

African Debt Relief: Moral Hazard and Internal Politics

The G8 is considering massive debt relief for African nations that are breaking under disease, interest payments, AIDS, periodic mass slaughters and other calamities that unfortunately and predictably plague the dark continent. A reasonable person might be forced to ask "Well, if debt relief was all it took to help these nations, why haven't the West dropped the debt before now?". A quick review of the state of the G8 might reveal that the inertia on this issue is not simply a case of neglecting a poor neighbour. On the contrary, aide to Africa has been one of President George W. Bush's pet projects, upping per year aide to the continent to the tune of $15B. In fact, there are two key stumbling blocks that keep the G8 and other countries from eliminating African debt: moral hazard and the internal politics of the G8 nations.

The fact is that several of the G8 nations are stumbling with their own debt, making massive relief of African debt, or "foreign" debt, a non-starter. Both France and Germany are running huge deficits, breaking the European Union's stability pact. This is a big political worry for Schroeder, as he approaches an almost certain loss in the elections later this year, and for Chirac, who has already suffered a loss on the EU constitution. For its part, the US is grappling with a rapidly expanding debt due to the double deficits, and a 5% budget deficit. Italy's Berlusconi will also have a tough time selling foreign debt relief when Italy is struggling with a debt load of over 100% of the GDP. Japan, while being extremely generous with cash for poorer nations, is in a similar bind with a debt load approaching 150% of GDP. As much as the G8 nations would like to drop the debt, their own political situations complicate this.

The next problem is known as the moral hazard of forgiving the debt of dictatorships and military juntas, whose borrowed cash ended up in the pockets of the ruled rather than the hands of the needy. To forgive the debt would be a de facto forgiveness of the actions of those horrible leaders. Uganda, for example, is now a shining beacon of light for sub-Saharan Africa. After years of slaughter, the country seems back on track for the most part. But even under the careful guidance of Museveni (does that rhyme with "Mousolini"?), over $100M/year of the budget is diverted from general revenue to kickback schemes and mismanagement. While in Canada, this might be sniffed at as the yearly shenanigans of a Liberal government, in Uganda this a proportionately huge number. And the donors that contribute one half of the budget revenues are getting nervous. Just as problematic has been the revelation that for Africa as a whole, over $148B/year goes down the drain in corruption related activity.

What's the solution to this corruption and the problem of selling debt relief on countries with their own debt problems?

Corruption, of course, is not an easily solved puzzle. But a culture and history of corruption aren't the death knell of reform. Most corruption centres around monetary payoffs, so the cynic might conclude that the only way to combat a monetary incentive of graft, is to outbid it by a monetary incentive of reform. What can achieve this? Set stringent targets for the creation of democratic and healthy nations (free press, civil rights, multiparty elections, etc) and working capital markets (foreign investment targets, strong central banks). If targets are met, then more debt relief will be given. Start off with low benchmarks and make them progressively harder to reach. A smarter approach would not be to limit these benchmarks to one issue or another, but eventually have graduated debt relief (or aid) for a variety of problem areas for Africa. In a nutshell, the idea is to make the eradication of every awful vice that plagues an African nation a potential windfall for their people.

For donor nations, the small, initial amount of debt relief will be an easy sell, while larger, more substantial debt relief will be down the road. The idea is that by the time the continent has cleaned up its act, the West's electorates will be used to the idea of graduated debt relief, while their leaders will have their own books in order.

A more constructive idea, is to get money past the NGO's, the unproductive UN, the ghastly governments and the do-gooder Christian missionaries (more intent on conversion than relief), is to drop the trade barriers to African agricultural products. Currently, the West spends over $300B subsidizing the Common Agricultural Policy of the EU and the Midwestern US farmers who recieve on average almost $160,000/year. Japan, for its part, stops imports cold with massive tariffs on outside food making its way to Japan's shores. In conjunction with graduated debt relief, the West could make tariff relief a prerequisite.

If there were a common, comprehensive initiative amongst the G8 to push for the relief of debt (over the long haul) and tariffs, Africans might see a real improvement in their standard of living. For the time being, Africans will need to wait for a healthier economic west, more willing and able to help than its present form, more intent on pleasing a home electorate.

Thursday, June 02, 2005

Top Ten Things I Learned In Japan

My days in the Land of the Rising Sun are coming to an end, so I'm running down some simple lessons I have taken in:

10. In Japan, a customer at any pub/restaurant is required to first declare "Itadakimasu!" as word of thanks before eating and then eat every last grain of rice left in any given bowl. To accomplish this task given only chopsticks, hold the bowl sideways while pressing the chopsticks flat against the inner surface of the bowl and scrape the rice out.

I don't speak Japanese, but I can sure eat Japanese.

9. Liberally apply social grease in any social interaction. Being polite and deferrential goes a long way towards harmony. There's your moment of zen.

8. Bowing is cooler than shaking hands. A cool combination of the two methods is even better. If you can work in a smile and "pounds out", then you're the man.

7. Green space is important. You never really appreciate it until you don't have it anymore...They paved paradise, to put up a Paschinko parlour.

6. Be patient... except if you are wearing a different country's logos and gear.. Then by all means go to town..."Damn those Norwegians. So impatient!"

5. If you ever think minorities are overly sensitive about their status or tribulations, just try living as one for a while.

Know what I'm sayin', J-Roc?

4. Never try to 'wing it' from Kansai Airport to your 'hood. If it should only take 90 minutes, it could damn near take 8 hours and a sore back if you don't know what you are doing.

3. Acoustic guitars are more awe-inducing than any other instrument....just don't bother trying to take one through the Osaka subway system during rush hour.

2. Get out of your comfort zone and stay outside it--that's my submission for a "No Fear" t-shirt slogan, anyway.

1. Gambatte! Attempting to do your best will determine success more than natural ability, or aptitude. "Gambatte" translated into Canadian is roughly:

"Go hard 'r go home, eh?"

Sunday, May 01, 2005

Non Comment

On May 29, 2005 the French will vote 'Non' in a referendum, killing the ratification of the European Constitution and will imperil the existence of the EU.

That's the way things look as of today. The Non side has gained a sizable advantage against an enfeebled graduate of ENA and leader of the political class, Jacques Chirac. While it would be easy to say it is simply a test of his leadership, but the truth is that France is beginning to feel as Euro-Skeptical as its uneasy northern neighbour, Britain. Mais..Pourquoi? France is unquestionably the most influential member of the EU, and had the most say over the constitution's writing. If it were not stated explicitly that Brusselles was the capital, one would surely assume that Paris was running the show, and only from Paris because Versailles ("Toutes Les Gloires De La France") is such a great tourist trap. France has reason to throw the baby and the bathwater on the heads of the political class that has dragged country into what has been a great economic and political success for France, but has thrown the people of France into a serious existential fable with only a Camus-like ending: Frustration, violence, inner turmoil, ethnic strife and a rejection of the world.

The growing skepticism that the EU inspires in France is not confined to one issue or another- it is a mosaic of problems that will be the heard in the voice of the French voters. While the administration of France has surged into post-Catholic, post-modern, post-communism and post-pill world with policies that fill the unskilled workforce with ghettos of disenchanted Muslims from former hellhole colonies, the French people have had to learn to deal with their compromised existence. In many Western nations, immigration has been a blessing that has constantly reinvigorated nations. In France however, there has been no effort to bring Muslim immigrants into the identity of France. They are a forever excluded group, dwelling in massive unpoliced and violent hoods, devoid of French language, culture or schooling. Instead of assimilation and acceptance, the French have dealt with new immigration with a pc solution (replace aging workers with young muslism immigrants), with decidedly un pc coping mechanisms (banning head scarves). The result is a burgeoning underclass of angry voters and parallel powers (an emerging Islamist movement) that threatens the values of the French Revolution.

The inability to assimilate and accept immigrants is only one of many problems. Another key problem for France is that it is has emerged from the most influential of the original six members to being one of the many twenty-five nations begging for recognition at the European dinner table. While France was one of only two nuclear powers, a larger population nation, and a significant economic power in the old union, the new union is becoming a haven for the eastern pro-US republics seeking shelter from their abusive Ex, the USSRussia. In essence, the EU's ship of state is far too large for any one nation to steer by itself, and the former Captain can no longer determine its course.

The enlargement of the EU doesn't just mean that Frances' relative size and power will be diluted, or that hostile immigration will inflame social tension, it also means that these that these two poison pills of accepting the constitution will be realized by one event:

Turkey's acceptance into the group.

Turkey, long a bridge from Europe into the wider continent and a symbol of hope to Middle Eastern democrats, represents the culmination of France's decimated power and increased social strife. If accepted, France may well fear that the gates of holding back the swarm will be lowered, and the nation will be overwhelmed by the massive eastern counterweight of 70 M Turks. The EU has already started its talks with Turkey, but to many EU voters it is a sure sign that their worst fears may be confirmed and that the rapid changes that have changed the face of Europe will continue.

This is say nothing of the growing trade disputes and stability pacts that have threatened France's heavily subsidized pastoral farms, the very mythic setting of France's past held close to the heart of every red wine swilling Frenchman.

France's Oui side may yet pull something out of its hat to save the referendum, but for the time being, the French Government and the Eurocrats will be dusting of plans B through Z to deal with a Non vote and those alternatives do not look pretty. While France can go back to the voters time and again until a Yes vote is secured (a la Ireland), Britain and the Netherlands will be voting in the meantime and will be heavily influenced by the outcome of this French vote.
It is possible that there will be a retrenching of power, where the original six maintain their relationships, while limiting the power of the newcomers and immigration from the East.

Whatever the outcome of the vote, the French will need to find solutions to its internal problems that cannot be swept under carpet of a decent economy and an ability to punch above its weight on the world stage.